PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending November 3rd, 2013

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Milestones Emerge in European Gas Supply, While International Coal Prices Recede, Reflecting Fundamental Once Again

PIRA Energy Group

PIRA Energy Group

The modest month-on-month gain in average daily Henry Hub prices helped lift nearly all regional prices in October relative to September levels, even in Appalachia.

NYC-based PIRA Energy Group reports that milestones have emerged in European gas supply. In North America, most gas prices had month-on-month gains in October along with Henry Hub, but not all. In Asia, Japan loads up on LNG contract volumes, limiting spot exposure. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Milestones Emerge in European Supply

PIRA projects that peak U.K. gas production this winter will not reach levels that would even cover the low point for U.K. gas demand in the middle of the summer. Volume is an issue, but it is lower flexibility this winter that is even more significant for price. Meanwhile, the Russian production in October established the largest year-on-year gain since the post recession recovery in May 2012.

Most North American Gas Prices Post M/M Gains in October Along With Henry Hub, but Not All

The modest month-on-month gain in average daily Henry Hub prices helped lift nearly all regional prices in October relative to September levels, even in Appalachia. Only a few points failed to gain month-to-month, namely those in the Northeast such as Transco Z6 and Dawn in eastern Canada. The clear standout performer to the upside, however was AECO in western Canada, which soared from a low in late September to a high in October, cutting the basis discount from -44% to -14%.

Japan Loads Up on Contract Volumes, Limits Spot Exposure

Japan is heading into its winter peak under highly unusual circumstances; no nuclear power, combined with a general downtrend in LNG consumption, makes it a challenge to determine exactly how short – if at all – of spot LNG Japan will be this winter. Never mind reports that they are “well supplied,” such stories often appear at this time of the year, and besides, no one can say with any certainty what December weather will look like. Still, spot volumes are clearly being pushed out of Asia in favor of volumes from contracted suppliers within the region as well as in the Mideast.

Risks to Peak Supply this Winter Justify Lengthy Positions

The core reasons that winter spot prices are up strongly over the past two months are valid ones; if the weather becomes colder than normal, it is not entirely clear where the incremental supply will come from to balance the market at current prices. While the working gas storage situation has improved in October – Germany, Italy, the U.K., and Austria all set injection records for the month – it is by no means at a level that provides an adequate cushion for the entire winter. What the market faces is a wide variety of demand outcomes due to weather with a highly constrained number of supply options to balance.

NYC-based PIRA Energy Group reports that international coal prices receded, reflecting fundamental once again. In the U.S., electricity spot on-peak prices declined from September levels as cooler weather reduced loads in the Southwest. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Coal Prices Recede, Reflecting Fundamental Once Again

The non-fundamentally driven meteoric rise in seaborne coal prices came back to earth last week, with API#4 (South Africa) and API#2 (Northwest Europe) retreating from the spike in prices in the prior week. As FOB Newcastle (Australia) prices did not initially surge to the same extent as Atlantic Basin prices, the downward correction was also muted by comparison. Deferred prices of all three forward curves lost ground, but only to a limited extent. In the pricing surge, PIRA had warned caution on the risky nature of trading in a market which was not moving with fundamentals; however that dynamic has appeared to shift in the last week.

Early Chill Keeps Mid-Columbia Firm as Southwest Softens

Spot on-peak power prices declined from September levels as cooler weather reduced loads in the Southwest. California markets saw the steepest drops and Mid-Columbia the shallowest. Cooler-than-normal conditions in the Northwest resulted in rising heating loads helping to boost gas prices and supporting power. PIRA estimates that WECC US loads were down 2.0% from the prior year, while demand in WECC Canada increased. Following a slight gain in September, weather-adjusted loads for the WECC as a whole appeared to falter this month.

Stronger Supply Side So Far in 4Q13

Spot market developments so far during 4Q13 have mirrored a more robust supply side, confirming PIRA's idea that the bullishness of 3Q13 was predominantly tied to short-term factors rather than structural ones. In fact, German renewable generation resumed its upward march during October, with extreme fluctuations in wind output leading to a new price crash – albeit a more moderate drop than the ones that occurred during the second quarter, as a result of somewhat stronger industrial demand and German power exports.

The information above is part of PIRA Energy Group's weekly Energy Market Recap, which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

Click here for additional information on PIRA’s global energy commodity market research services.

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